Members of the European Central Bank's (ECB) governing council have fuelled speculation that a cut in interest rates is on the way. They defended the ECB's monetary policy against charges that it is strangling economic growth and dismissed fears of Japanese-style deflation in the euro zone.

Finland's central bank governor, Ms Sirkka Hamalainen, told an economic conference in Berlin on Saturday that lower growth and a stronger euro were dampening the inflation outlook in the eurozone. "Earlier we saw risks were balanced but now we see the inflation risks are not that big," she said.

The Bundesbank president, Mr Ernst Welteke, said the ECB would examine recent gloomy economic forecasts when considering the next move on interest rates. "We will continue to discuss recent lower growth forecasts at the ECB," he said.

The central bank's governing council was divided at its last meeting over whether to cut interest rates from their present level of 3.25 per cent.

The bank's monthly bulletin for November, published last week, hinted strongly at a cut, possibly of 0.5 per cent, next month.

The central bank has come under growing pressure to cut rates, which have remained unchanged for a year, as the euro-zone's economy slows down.

Ms Hamalainen insisted on Saturday, however, that the experience of the 1970s and 1980s showed that monetary policy was not the answer to sluggish growth.

"There is a risk that this belief could cause a dangerous moral hazard problem. If monetary policy is believed to fix structural problems, both the private and public sector would feel able to escape their responsibilities," she said.

Mr Welteke dismissed fears that the euro zone and Germany in particular could be heading for deflation of the kind that has paralysed Japan's economy for a decade. "I don't think we are facing a deflation scenario as in Japan. "We don't have a property bubble like they had in Japan," he said.

But his predecessor as Bundesbank president, Mr Karl Otto Poehl, warned that, "if Germany catches a cold, its neighbours could get pneumonia".

He warned that Europe's biggest economy could be heading for a recession. I don't think the ECB can change this through rate cuts, but it would be helpful if they made a small contribution to getting the economy going again," he said.